Moody’s Investors Service changed its outlook for Saudi Arabia’s banks to negative from stable on the expectation that bad loans will rise over the next 12 to 18 months because of low oil prices and a decline in government spending.
Non-performing loans will rise to about 2.5% of total loans over the period, from a “very low average 1.4% in September 2015,” Olivier Panis, a vice president at the ratings firm, said in a statement on Wednesday. Banks will also remain exposed to loan defaults owing to their “persistently high single-party exposures,” the analyst said, Bloomberg reported.
Saudi Arabia’s economic growth will slow to 1.5% in 2016 and 2% in 2017, well below the 3.4% growth estimated for 2015 because of the impact of lower crude prices, according to Moody’s. Banks’ loan growth will slow to between 3% and 5% in 2016, from 8% in 2015 and 12% the previous year, it said.
Still, capital buffers of Saudi banks are likely to remain “solid,” with the sector’s average tangible common equity ratio remaining stable at about 15.7% at the end of 2016, compared with 15.4% in September 2015, Moody’s said. Profitability is also likely to remain strong because of the banks’ lean cost structures and zero corporate tax, it said.
“Tightening liquidity—as public-sector deposit inflows and corporate profits moderate—will likely expose banks to greater funding volatility in line with regional pressures,” Khalid Howladar, a senior credit officer based in Dubai, said in the report. “However, we expect the local impact to be manageable and funding structures to remain relatively stable thanks to a broad and growing depositor base.”
